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Liquidity Crises in Emerging Markets: Theory and Policy

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  • Chang, R.
  • Velasco, A.

Abstract

We build a model of financial sector illiquidity in an open economy. Illiquidity defined as a situation in which a country's consolidated financial system has potential short-term obligations in foreign currency that exceed the amount of foreign currency it can have access to on short notice can be associated with self fulfilling bank and/or currency crises. We focus on the policy implications of the model, and study the role of capital inflows and the maturity of external debt, the way in which real exchange rate depreciation can transmit and magnify the effects of bank illiquidity, options for financial regulation, the role of debt and deficits, and the implications of adopting different exchange rate regimes.

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File URL: http://econ.as.nyu.edu/docs/IO/9186/RR99-14.PDF
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Bibliographic Info

Paper provided by C.V. Starr Center for Applied Economics, New York University in its series Working Papers with number 99-14.

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Length: 60 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:cvs:starer:99-14

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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
Phone: (212) 998-8936
Fax: (212) 995-3932
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Web page: http://econ.as.nyu.edu/object/econ.cvstarr.html
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Postal: C.V. Starr Center, Department of Economics, New York University, 19 W. 4th Street, 6th Floor, New York, NY 10012
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  1. Feldstein, Martin, 1999. "A Self-Help Guide for Emerging Markets," Scholarly Articles 2961700, Harvard University Department of Economics.
  2. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2000. "Capital Markets and the Instability of Open Economies," Working Papers 99.01 update, Swiss National Bank, Study Center Gerzensee.
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  27. Velasco, Andres, 1987. "Financial crises and balance of payments crises : A simple model of the southern cone experience," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 263-283, October.
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